Buy Downs

The terms “buydown” and “buying down the interest rate” are related but can be understood slightly differently in the context of home mortgages:

A buydown is like a special deal where you pay a little extra money upfront when you get a mortgage to make your monthly payments lower for a few years or even for the whole time you have the loan. It’s like paying a bit more at the start to get a discount on your monthly bills. This can be really helpful if you think you need lower payments at the beginning of owning a home. There are two main types:

1. Temporary Buydowns: These reduce your mortgage payments for a few initial years. For example, the “2-1 buydown” lowers your interest rate by 2% in the first year and 1% in the second year, then it goes back to the normal rate.

2. Permanent Buydowns: These lower your interest rate for the entire length of your mortgage, which means your monthly payments are reduced for as long as you have the loan.

Buydowns can be useful if you expect your income to increase in the future or if you want to have extra money for other expenses like renovations in the early years of homeownership.

When a buyer “buys down” the interest rate, it means they’re paying an upfront fee to lower the interest rate on their mortgage. This can make a big difference in monthly payments. Here’s how it works:

1. Paying Points: The buyer pays what are called “points” at closing. One point usually costs 1% of the total loan amount. Paying these points upfront reduces the interest rate for the duration of the loan, saving money on monthly payments.

2. Cost vs. Benefit: This can be a smart move if the buyer plans to stay in the home for a long time, as the initial cost can be offset by the long-term savings in interest payments. However, it’s important to calculate whether the upfront cost is worth it based on how long you plan to keep the mortgage.

3. Negotiation: Sometimes, the seller may offer to pay points as part of the sale negotiation to make the deal more attractive, or a builder might offer it as an incentive to buy a new home.

This strategy can lower your mortgage payments significantly, making it a financially sound decision if you are committed to staying in the home long enough to recoup the upfront costs through lower monthly payments.

Here is the difference:

1. Buydown:

• This generally refers to any payment made to reduce the interest rate on a loan for a temporary or permanent period. A buydown can be part of a broader strategy or offer in mortgage agreements where the interest rate is reduced for a certain period or over the life of the loan, often through an upfront payment.

• Buydowns can be temporary or permanent. Temporary buydowns, like the 2-1 buydown, lower the interest rate for the first few years of the mortgage only. Permanent buydowns reduce the interest rate for the entire duration of the mortgage.

2. Buying Down the Interest Rate:

• This is a specific type of buydown that typically refers to paying points (prepaid interest) at closing to permanently lower the interest rate on a mortgage. When a buyer “buys down the rate,” they pay an upfront fee in exchange for a lower interest rate throughout the loan term.

• This is seen as a form of investment where the buyer pays more upfront to save on interest payments over time. This strategy is often used when buyers anticipate holding the mortgage for a long period and want to reduce long-term interest costs.

In essence, while all buying down the interest rate actions are buydowns, not all buydowns are about buying down the rate permanently. Some might only reduce rates temporarily or involve different structures or incentives that also lower payments but not strictly through reducing the rate.